Is the patent system self correcting, or are we going too far?

Rudy Telscher

Rudy Telscher represented Octane Fitness in one of the most important patent cases decided by the United States Supreme Court over the last decade. The Supreme Court’s decision in Octane Fitness v. Icon Health & Fitness granted district court judges broad discretion to award attorneys fees as they see fit in patent litigation. This decision, and a decision in a companion case (i.e.,  Highmark, Inc. v. Allcare Health Management System, Inc.) derailed patent reform during the 113th Congress.

Fee shifting provisions are again front in center in both the Innovation Act in the House of Representatives and the PATENT Act in the Senate. With this in mind I thought it would be interesting to speak with Telscher on the record. He obliged. In part one of my interview with Telscher we discussed the back story of the case, how Octane Fitness was the little guy getting pushed around by the larger corporation. We discussed the problem of patent trolls, and started discussing litigating in the Eastern District of Texas.

In part two of my interview, which appears below, we finish our discussion on the Eastern District of Texas and move into discussing patent reform and what really could be done to fix the patent system. To start reading from the beginning please see Behind the Scenes on Octane Fitness.

Without further ado, here is the final installment of my interview with Rudy Telscher.

[Interviews]

QUINN: Well, let me go at this in another way or maybe a little bit of a deeper dive. I do realize that Congress is not just going to carve out patent jurisdiction from the Eastern District of Texas, although I think they probably should. But the reason I come back to get people to think I’m delusional, but it offends me that throughout patent law we have this third grade approach to handling the bad actors. And I’ve written about this several times before. Do you remember when we were in the third grade and there was some clown that did something stupid and it cost everybody recess? When 29 of the kids in the class were well behaved, doing their homework, sitting in their seats just one clown and the teacher would punish everybody, right? I just don’t understand why that approach to discipline makes any sense whatsoever, but I see it everywhere.

TELSCHER: I agree with you. I think your analogy is dead on. It’s one jurisdiction that’s been too aggressive with their pursuit of patent cases and making themselves attractive to patent cases and your point is why not just single them out. And I think unfortunately Congress is not going to be willing to do that.

QUINN: But I also think that to some extent, you know, bringing it back to the Octane case, that’s what the Supreme Court has said. Rather than have legislatively mandated fee shifting as would be in the House version they told district court judges to figure out who deserves to be punished with that sanction and to use discretion. I mean it seems like the Supreme Court is asking the judges to use the inherent powers of the court and exercise the purest function of judging, which I think is to give them just broader discretion and stay out of their way.

TELSCHER: I think that’s right. I think that’s what the Supreme Court believes and that’s why there’s a tension between the Supreme Court and federal circuit because the Supreme Court trusts district court judges. The Supreme Court gives broader more vague standards and just trusts the district courts can apply those standards, look at the facts and do justice. And I think quite frankly the district court judges get that correct. The only problem you got is 1404 would be a very potent weapon to get cases out of the Eastern District of Texas. The only problem is that the Eastern District of Texas really hasn’t, they don’t have an interest in granting 1404 motions. But I think you could make the case that they do like being a big patent jurisdiction and so they’re going to be more reluctant to grant those motions. Whereas a lot of, you know, the Octane case is a classic example. We had Icon sue us in California because it was a slow painful jurisdiction and we moved for transfer under 1404 and there was a California judge going, ‘yeah, plaintiff’s from Utah and defendant’s from Minnesota, I don’t need this case.’ See ya, bye patent case. We got enough litigation here we don’t need guys that aren’t from here trying to use our court. And yet the Eastern District of Texas is more than fine with nobody being from there and all these patent cases being in their jurisdiction it’s been their claim to fame. And I get it. I think there’s a lot of smart judges down in In the Eastern District, but I think that they’re keeping way too many cases. I mean it’s obvious that there’s forum shopping going on when that small little jurisdiction has the majority of patent cases in this country. I mean that’s easy to see. Nobody can make the rational case that somehow it makes sense that all of these patent cases are in that small of a jurisdiction.

QUINN: Right. I mean the only way you could do it is just to turn that into the patent courthouse for the country, but we’re specifically not supposed to do that. Under the Constitution they want these cases to be decided by a jury of your peers in a geographical location that makes sense for the dispute. Having even a select number of courthouse for patent disputes creates real tension because that isn’t the way the Judiciary has historically been conceived.

TELSCHER: Right. I totally agree. We’re so much on the same page on this issue.

QUINN: What do you think needs to happen in the patent system in order to create a better patent system? Whether it’s for enforcement or whether it’s for licensing purposes. If we were really talking about trying to make the system better what would the discussion look like?

TELSCHER: Well, first of all I’m going to tell you I think there have been a number of advancements that have us strongly on the right track. Does that mean that we’re all the way there? No. But let’s talk about it. So you go back and let’s think about the patent system more philosophically. You’ve got a bunch of examiners sitting out in Washington D.C. and a couple of various other offices around the country. And they’ve got to in a limited amount of time review patents, do a prior art search and figure out whether a patent should issue. It should be obvious to anyone that there’s going to be errors with a system like that when you’re dealing with complex technology and over 8 million patents in existence. Now that would have been a problem. So we say okay, we may have patents that never should have issues or they issued too broadly.

Well now with the AIA you got post grant review and you got IPRs where you can go in with no presumption, no burden of proof, no clear and convincing evidence. So if you were a potential infringer and you think a patent shouldn’t have issued that it’s too broad or never should have issued at all you have your own prior art search you go before the patent office ‘hey, you guys didn’t have this stuff. Here’s the good stuff now look at this.’ and it is no longer you know ex parte reexam it’s our lawyers get to go toe-to-toe with the plaintiff in front of a board of three out of the patent office and good decisions are getting made. And you look at the rate of claims being invalided now in these IPRs, you know, it’s still sitting around 80%. And nobody should be embarrassed by that. It just reflects that a patent examiner at the front end is going to make mistakes. But now we have a much more inexpensive way to get rid of bad patents. Either post grant review or IPRs. So I think that’s wonderful. We now have that ability, companies can take on bad patents. There we are. When you look at what’s going on in the federal courts, so what I have seen is not a problem with getting rid of patents where you think they’re invalid because we have those options now, cost effective options. So the bigger problem that I saw was scope of claims. Plaintiffs coming in and alleging scopes of claims that were unreasonable.

Well, now the Supreme Court has stepped in and Alice is getting rid of abstract patents. Nautilus it’s easier to show that claims are indefinite. And now you’ve got Octane, which if somebody’s acting unreasonably with their scope and you don’t know ‘em out with Alice or Nautilus but you also show that they’ve asserted an irrational claim scope to try to cover a defendant’s product you got all these weapons. You know, and the Supreme Court continues to take on these intellectual property cases and really I think put the law in a position where case filings are down. I mean so when you look at the fact that case filings are down everybody’s talking to us. I was talking with one of my large clients recently that said, looking forward to give you your next case but fortunately for us we haven’t been sued in a while. So I think the system is actually in the process of self correcting. Now at the end of the day nobody should ever expect a perfect system because we’re dealing with complex technology, complex patent doctrines with competing experts so there’s always going to be some level of abuse right? But the real question is is the abuse being curtailed substantially? Is the system becoming more rational again? And I think the answer is yes from my view.

QUINN: Now I personally think that the system has gotten so one sided away from the patent owner. I can’t argue that all patents issued are good and that none of them shouldn’t die. What I worry about is a trend over the last ten years that seems to have gone from a time when we had really strong patent rights to a point where it seems increasingly that patent claims worth litigating are nearly always invalidated. And I wonder where the point is at which this starts to really negatively impact smaller companies that need patents more in order to fend off the larger players. Have you given that any thought?

TELSCHER: Well, I agree with you absolutely. I am a huge proponent in a strong patent system. And there are two buckets of companies in this country generally speaking. The one bucket is people that make products. You know, and I’m generalizing at a high level here. But there are all the companies whether it be small or large that have to make products. And if you make a product that’s innovative it’s going to get copies in China and brought right back into this country at a fraction of the price and you can’t compete. So to companies that make products patents are essential. A strong patent system is essential. For the companies that sell software, Microsoft, Google, you know, service providers but not selling a product, that’s bucket number two. Non-product generators but they’re still innovators. Well, Microsoft doesn’t need patents to protect its market share. It’s got market power. Google’s got market power. So patents to them are a nuisance. These companies are rarely acting as plaintiffs even though they have lots of patents. They don’t need it to be successful. So to answer your question, yeah, I do have a concern that we got so worked up about how bad the patent system is that sometimes you overcorrect. And that’s your point. There may be some overcorrection going on and does it make a little bit nervous that win rates under Alice are high as they are. Are the courts getting maybe a little bit too carried away with knocking down patent—we have to be careful. Everybody has to be careful because you’re right if we undermine our patent system that is the only thing that allows America to remain strong competitively because China they just have labor rates that are a fraction of ours. We couldn’t possibly make products as cheaply as China. And so the only reason why China has to respect us is our patents. The minute that China thinks that our patents aren’t going to be enforced they have little incentive to play ball with us.

QUINN: That really worries me. Although what I will say is just recently I went out to San Francisco and attended the Intellectual Property Business Congress. I heard from numerous different people out there that much of the current activity in the patent acquisition market comes from overseas buyers. And I hear over and over again it’s because the Chinese or the Europeans just can’t believe what we’re doing to our patent system. They’re much more optimistic than we are I think. And for example I heard the Chinese specifically think that there’s some kind of a trap here that they haven’t figured out because why would we have gone this far against patent rights. And I just don’t understand where we’re going. Maybe it’s I don’t understand where the end game takes us because it looks like we’re headed down the wrong path; a path where the Chinese will rule the world at least in terms of the technology and the companies that deliver innovative solutions.

TELSCHER: Well, we need to be careful. And the reason I went into what I call my two bucket analysis is because the software companies have really got a loud voice in Congress. Microsoft, Google so these are the companies that don’t care about patents as much and the product based companies who need patents to compete they need to make sure their voice is heard. We need to make sure that Congress isn’t hearing so much about how bad the patent system is that they without intention undermine it in significant part and then hurt our competitive advantage against China. I mean that’s all possible. I agree. I share that concern.

QUINN: Yes.

TELSCHER: But a lot of it’s whose got the voice of Congress when you think about it.

QUINN: I know. And a lot of people jump to the nefarious. I don’t think you have to do that. I mean certainly there’s a lot of money changing hands in DC, but I’m not going to say or allege that there’s anything illegal about that. I believe people have a right to talk to their representatives and try and influence them. That’s what we have, that’s the system we have.

TELSCHER: Totally agree.

QUINN: And companies like Google and others are not going out and hiring your average Joe attorney; they’re hiring the best people and the best lobbyists. And after somebody like that has talked to you it’s completely understandable that you would think that their position has got a lot of merit. Those attorneys and lobbyists are not getting hired because they’re inarticulate. They’re very articulate and very persuasive.

TELSCHER: I agree. I think you just pegged it and that was the point I was really making is that there’s a chunk of our economy that’s software based and those people are less concerned about patent rights than the other chunk of our economy that’s based on the provision of products.

QUINN: Right. Well, I really appreciate you taking the time to chat with me today, but before I let you go the last question I have relates to the future. Looking into your crystal ball, if you are trying to figure out what the future holds, what would you say? Are you bullish on the patent system? Do you think the patent system is going into a bear market, so to speak? Where do you think we’re headed?

TELSCHER: Well, I think that I’m not bearish to the point of thinking that everything’s going down the tubes. Or that we’re going back to the state of affairs that existed prior to 1982. 1982 is when the federal circuit was created. And the federal circuit has been a strong proponent of a strong patent system and I don’t see that changing. I think there are pressures that are hurting the patent system. I share your view that the equilibrium may be shifting and the pendulum may be going too far in the negative direction. But I think there’s a lot of lobbying going on right now before Congress that’s telling them be careful what you’re messing with here. So I’m cautiously optimistic that this won’t get carried away too far.

QUINN: Well, great. Thank you very much I really appreciate you taking the time.

TELSCHER: No, I enjoyed talking to you. You obviously know a ton about this. Sometimes I do these interviews and the people don’t know much at all so you obviously are on top of all the issues so it’s really a pleasure to talk with you about it.